For those who feel they can repay their mortgage quicker by having an investment running alongside it, an interest only mortgage would be appropriate. These mortgages are popular when buying a property which is unlikely to go down in value; the property can be subsequently sold at the end of the mortgage period to repay the initial capital.

What is an Interest Only Mortgage?

As their name suggests, interest only mortgages are paid off solely from the interest accumulated on the mortgage, without the borrower being required to pay back the loan taken out for the property during the mortgage term. The monthly payments are therefore lower than more traditional mortgage types, such as repayment mortgages, in which both interest and capital are paid in monthly sums. Since the loan itself is never paid back, however, at the end of the loan term the borrower will still owe the full amount of the money borrowed for purchase of the property.

Paying back the capital sum must, then, be done by other means such as from the proceeds of a separate investment, in stock or shares for example; it can also be possible to proceed by remortgaging the property in question, or even selling the property.

Choosing Interest Only Mortgages

The best interest only mortgages are those which have relatively low initial interest payments due to competitive mortgage rates: it can then be possible for the borrower to make extra payments to start to pay off the loan itself. This guards against falling property values, and means that any sale of the property at the end of the mortgage term is more likely to result in a profit. Further, if property prices have risen it is possible that upon sale of the property a sizeable lump sum may have been generated which could be invested in another property.

Disadvantages of Interest Only Mortgages

However this is to be achieved, it is important to carefully consider and plan how the outstanding capital will be repaid before taking out such a mortgage, and also to take account of relevant mortgage fees (which can be higher than with other types of mortgage such as repayment mortgages, offset mortgages and capped rate mortgages). Interest only types can be very risky as there is no guarantee that the entire mortgage will be repaid, and if the borrower is unable to repay the loan at the end of the mortgage term, the mortgage lender could take possession of their home. Indeed, repossession of homes bought with interest only mortgages is an increasing problem. It has been advised that people in danger of having their property repossessed should convert any outstanding balance of a loan to a repayment mortgage to ensure repayment. Alternatively, remortgaging to extend the term of an interest only mortgage could provide more time for their repayment arrangement to produce sufficient funds to repay the original loan.

Additionally, there is always the possibility of a sharp rise in interest only mortgage rates, meaning borrowers may struggle to find an interest only mortgage deal that is affordable long term.

Advantages of Interest Only Mortgages

Interest only mortgages do, however, provide benefits for certain people. To compare interest only mortgages with those which those which require full repayment of the capital, the former type of mortgage is specifically well-suited to those who cannot afford to purchase a property immediately as the monthly costs are substantially lower.

Interest Only Mortgage Deals

Interest only mortgage deals can be sourced from an array of lenders, and an interest only mortgage calculator can be used to assess monthly payments for different sized mortgages. Though they should only be used as a guide, interest only calculators will enable borrowers to determine how much money they can afford to borrow before approaching interest only mortgage lenders.

This website is for informational purposes only, and should not be taken as advice on how to obtain credit or manage it. It is essential that anyone considering taking out credit should obtain professional advice before doing so, as mishandling credit can lead to repossession of property, including a person's home, or worse.